India’s first real estate investment trust (REIT), Embassy Office Parks REIT has opened for subscription on 18th March. It is open to retail investors too. The issue is targeting to raise Rs 4,750 crore, of which Rs 876 crore (29,208,800 units @ Rs 300) is strategic investor allocation. The issue price band is Rs 299-300. The IPO will close on 20th March.
Anchor investors have already subscribed to Rs 1,743 crore worth units. Anchors include trusts controlled by retailer Radhakishan Damani, Fidelity, American Funds insurance, Aviva Investors, TT Emerging, Schroder, Citigroup, Kotak Mahindra Insurance, Wells Fargo, Lockheed Martin, Morgan Stanley France, Japan Trustee Services Bank are among other anchor investors.
Here is what retail investors must know about India’s first REIT IPO.
REIT is an investment vehicle that owns and operates rent-yielding real estate assets – like mutual funds which hold shares or debt securities. It allows individual investors to invest using this platform and earn income.
Income earned by REITs could be through rentals or capital gains or both and the same gets distributed to unit holders. SEBI guidelines state that REITs shall distribute >90% of the net distributable cash flows to its investors at least on a half yearly basis.
The offer documents do not affirm any indicative yield, but market sources indicate that it should be around 8-9% pre tax. (Rental yields on commercial properties are typically in the range of 7-9% and capital appreciation could be expected over a long term.)
Assets – Embassy’s Portfolio comprises seven office parks and four prime city-center office buildings totalling 32.7 million square feet as of December 31, 2018, with strategic amenities, including two completed and two under-construction hotels totalling 1,096 keys, food courts, employee transportation and childcare facilities. It has invested in submarkets of India’s key office markets of Bengaluru, Pune, Mumbai and Noida. Approximately 80.9% of the gross rentals from its 160+ marquee tenant base is contracted with leading MNCs and approximately 43.4% is contracted with Fortune 500 firms such as JP Morgan, IBM and Microsoft, as of December 31, 2018.
Debt – At the end of first nine months of FY19, Embassy REIT had borrowings (outstanding) of nearly Rs 7,900 crore. This is as per its balance sheet. The borrowings number is at similar levels to FY18. From the net proceeds of the IPO, Embassy plans to do Rs 3,710 crore worth partial or full repayment or pre-payment of bank/ financial institution debt of certain asset SPVs and the investment entity. Post the utilisation of the IPO proceeds, its total indebtedness is expected to be less than 15% of market value initially.
–The per unit REIT price range is Rs 299 to Rs 300.
–For IPO, the bid lot is 400 units.
–The minimum application size is 800 units, and 400 units thereafter. This means minimum investment is Rs 2.39 lakh for 800 units at Rs 299.
IPO market timings are 10.00 a.m. to 5.00 p.m.
The IPO e-form link is https://www.nseindiaipo.com/issueforms/html/index.html
Branches of Self Certified Syndicate Banks (SCSBs) where syndicate / sub syndicate member to submit ASBA form can be found here.
The lock-in period for anchor investors and strategic investor is 30 days from allotment date & 180 days from listing date respectively, while the lock-in for other unit holders is not less than a year from listing date.
Indian taxes arising out of capital gains on the sale of REIT units – any gain realised on the sale of units held for more than 36 months will be subject to capital gains tax in India at 10% (plus applicable surcharge and cess) if STT has been paid on the transaction.
Gains realised on the sale of units held for less than 36 months will be subject to capital gains tax in India at 15% (plus applicable surcharge and cess) if STT is paid on the transaction..
Any gain realised on the sale of the units held for more than 36 months to an Indian resident, on which no STT has been paid, will be subject to long-term capital gains tax in India at 20% (plus applicable surcharge and cess).
Further, any gain realised on the sale of units held for a period of 36 months or less and on which STT is not paid will be subject to short-term capital gains tax in India at normal rates at which the unit holder would be subject to tax on his other incomes.
Capital gains arising from the sale of the units will be exempt from taxation in India in cases where the exemption from taxation in India is provided under a treaty between India and the country of which the seller is resident.
RupeeIQ take – A REIT gives you dividend. But this dividend income is not a substitute for bank FD interest. A REIT is not for bank FD investors. It is suitable for investors who are ready to take more risk. The taxation implication of the REIT structure is unclear to some extent. We have been given to understand that the dividend component will not be taxed while interest income component of the total distribution will be taxed at the marginal tax rate. So, it is vital you consult a tax expert before investing.